Estimate Your Taxes With A Tax Bracket Calculator
Uh-oh, It’s the end of the year or worse yet April 15th is creeping up on you may be wondering, what is my tax liability for last year and how can I lower my tax burden to the IRS. Well, with a tax calculator and a little understanding about deductions you will be in a much more informed and strong position figuring out your tax owed. Not to say that you will be excited to pay your taxes because who is, but the goal of this article is share some insight on lowering your tax basis and understanding how our progressive tax system works. The most important thing to help you reduce your tax bill, is taking advantage of every tax deduction and tax credits that are available to you. After all of your deductions you will be able to accurately calculate your taxes as well as figure out which tax brackets you fall under. This article is only a small conversation regarding possible tax deductions available to you the IRS website is the best resource as it has all tax deductions available to you. There you will find every tax law. With some study of the various tax deductions and credits you will have the opportunity to save yourself a lot of money. Here, we are going to explore ways to reduce your income tax by taking advantage of tax credits and tax deductions, and how to determine your tax bracket using a tax bracket calculator and tax tables.
How to Minimize your Tax Bill
When the dreaded tax day comes around, it is obvious that you want to pay less and save more. There is nothing wrong with playing by the IRS rules to mitigate your tax liability. That is why they are there. To help guide you in legal strategies to reduce your tax burden.
Earned Income Tax Credit
Many people making low to moderate wages qualify for the income tax credit that can save your family money when the tax day comes. The amount of your income tax credit also depends on the number of dependent children that you have.
Here is the income tax credit scale for tax year 2015:
-$503 with no qualifying children
-$3,359 with one qualifying child
-$5,548 with two qualifying children
-$6,242 with three or more qualifying children
Most people don’t even realize this simple way to save money, easily. You should definitely check to see if you quality for this benefit.
Deduct Your Children
Your children are an asset to help reduce your tax liability – as a parent, you are entitled to tax benefits because of your children. The tax provision provides credit for childcare costs and the credit could add up to $1000 for every child under 17 years of age. Also, if you have more dependents in your household, you may eligible for more tax credit.
However, If you are a high earner, the child care tax credit may not apply for you in this case.
Small Business Tax Deductions
If you own a home business, take advantage of home office deduction. This deduction allows you to take out the estimated percentage of use of your home by your business. For example, if your home based business office takes up a third of your home then you may be entitled to deducts a 1/3 of your mortgage and/or rent plus utilities.
College Savings Plan
Take advantage of 529 College Savings Plan– since the introduction of 529 College Savings Plan in 1996, many parents have taken advantage of this opportunity to save more money and have it grow in the form of tax-free distributions. This plan allows you to contribute after-tax dollars which have been designated for higher education expenses such as fees, tuition, books and other supplies. These expenses are free of federal tax.
Create retirement contribution accounts– retirement contribution accounts are a handy tool for tax reduction and a great way to save money. A retirement account can help you create more savings by reducing your total taxable income. Most retirement contribution accounts such as 401(k), Roth 401(k), IRA and Roth IRA are given tax breaks by the government to encourage more saving and investing. This then reduces the total taxable income after paying for the retirement contribution account. The amount you save is therefore channeled to your retirement. By contributing to your retirement account, you save money in two ways. First by reducing your taxable income and then taking a part of the amount to your retirement account which grows tax free.
HSA – Health Savings Account
Use Health savings account– for those with a high deductible medical plan, contributing to a health savings account can be a viable escape route. The contributions made for health savings account are allowed to grow without tax deductions. This allows your money to grow as much as you keep contributing.
Take advantage of Gifts- gifts are considered as money or property that you give to someone whereby he can use the gift to increase his value. However, gifts are subject to taxation if their value is above the annual exclusion of $13,000. Below the annual exclusion value, gifts are tax deductible and you are exempted from gift tax returns. Gifts which are tax deductible include those given to charity, your spouse, political organization or which you pay directly for somebody’s tuition or medical expenses.
Tax credits for energy efficiency
taxpayers are encouraged to install items and devices which are energy efficient. The government offers tax credits if you install new windows, doors or heating and cooling systems which are energy efficient. This also includes installation of solar panels. Check with the IRS and your State and Local Tax authorities for all current allowable deductions or credits.
Business Tax Deductions
If you are self-employed, take advantage of business related tax deductions such as advertising, website fees, vehicle mileage, shipping, home internet charges, office supplies and much more. This covers all the expenses incurred in running your business and provides a great option to reduce tax levels.
Lifetime Learning Credit
The lifetime learning credit is a type of tax credit that directly reduces the amount of tax that you are supposed to pay. Those who can claim a lifetime learning credit include those who pay qualified education expenses for higher education, those who pay education expenses for an eligible student and if the eligible student is you or your spouse or a dependent. You can claim up to $2000 in a tax year, and there is no limit in the number of years.
By understanding the tax benefits entitled to you, you can increase your disposable income.
The Marginal Tax Rate and the Effective Tax Rate
It is important to know the difference between the marginal tax rate and the effective tax rate. Most people get confused especially when they relate both terms with the tax bracket. The marginal tax rate is directly related to your income tax bracket, while the effective tax rate refers to the actual amount of tax that you pay for your income. In this case, the effective tax rate is usually more important and it is what you should care about rather than the marginal tax rate. By knowing what the marginal rate is, you will be able to calculate your effective tax rate.
IRS publications do not have a precise and exact definition of the tax rates. The definitions are varied and different from each other. For example, a certain definition states that marginal tax rate focuses on the tax rate imposed on the last or next dollar received by a taxpayer while another recent definition states that the marginal tax rate is the highest level statutory tax rate bracket that is applied to a tax return. With these definitions, we can conclude in a simplified definition that marginal tax rate refers to the rates indicated in the rate schedules of income tax which are published each year. By following the federal income tax brackets, you will be able to understand the clear meaning of marginal tax rate and how to determine it using the tax brackets calculator. To determine this, you will have to study the 2015 tax tables and to see the changes from year to year check out the 2014 tax tables.
Studying the 2015 tax bracket, it is noted that the tax rates are increasing with a higher income. This represents the progressive tax system whereby those who earn more pay higher taxes from their earnings.
To understand the difference between marginal tax rate and the effective tax rate, let us look at the 2015 tax table and the corresponding tax brackets.
|Tax Bracket||Single filers||Married Filing Jointly or Qualifying Widow/Widower||Married Filing Separately||Head of Household|
|10%||taxable income up to $9,225||taxable income up to $18,450||taxable income up to $9,225||taxable income up to $13,150|
|15%||taxable income from $9,226 to $37,450||taxable income from$18,451 to $74,900||taxable income from $9,226 to $37,450||taxable income from $13,151 to $50,200|
|25%||taxable income from $37,451 to $90,750||taxable income from $74,901 to $151,200||taxable income from $37,451 to $75,600||taxable income from $50,201 to $129,600|
|28%||taxable income from $90,751 to $189,300||taxable income from $151,201 to $230,450||taxable income from $75,601 to $115,225||taxable income from $129,601 to $209,850|
|33%||taxable income from $189,301 to $411,500||taxable income from $230,451 to $411,500||taxable income from $115,226 to $205,750||taxable income from $209,851 to $411,500|
|35%||taxable income from $411,501 to $413,200||taxable income from $411,501 to $464,850||taxable income from $205,751 to $232,425||taxable income from $411,501 to $439,000|
|39.6%||taxable income of $413,201 or more||taxable income of $464,851 or more||taxable income of $232,426 or more||taxable income of $439,001 or more|
Those people in the 25% tax bracket, and also single filers, will be taxed both in the 10% and 15% tax bracket. Most people get confused when they assume that their income is only taxed for 25%. This is not the case. Those in the 28% tax bracket single filers or married jointly and any other group, will be taxed from the tax brackets above 28% (10%, 15% and 25%) including itself. The marginal tax rate is therefore your last dollar which is taxed, in this case found in the 28% tax bracket. Therefore 28% is your marginal tax rate.
The effective tax rate is the overall rate that you are charged and is obtained by doing an average of the sum of all the taxes you pay in each tax bracket. After getting the exact average, it is then determined on which tax bracket it falls under. This then becomes your effective tax rate which is more important than the marginal tax rate. You can determine the various values in your tax bracket using a tax brackets calculator for each year including the 2015 tax bracket calculator and the tax bracket calculator 2014 for the previous year.
We, as Americans, have many forms of taxation. Here are a few that I’m sure we are all pretty familiar with. Income tax, sales tax, real estate, excise and social security. There are many others. All these types of taxes amount to about 29.2% of total income spent by Americans each year. It is therefore important to know the types of taxes that gorge you money.
This is tax taken from your income by Federal and most State governments. The income tax also includes income gained from personal businesses and the interest gained. The nature of income tax is progressive and increases with each tax bracket. The more you earn, the higher the rate of taxation. The federal government publishes different rates every year, with the most recent tax rates ranging from 10% to 39.6%. This however varies with states and municipalities which have generally lower rates than the federal government tax rates. With income tax, you can minimize your tax bill using credits, allowances and deductions. This enables you to keep more of your hard earned money.
Capital gain tax– tax paid on profits made from the sale of an asset and normally applied to stock and bond transactions. This includes profits made from the sale of real estate. The capital gain tax has risen to 20% from 15%. As for single homeowners who sell their homes, they may exclude up to a maximum of $250,000 on the capital gain. This is conditional in that the house should be the main residence and occupied for at least two years or five years. For married couples that exclusion goes up to $500,000.
Estate tax– these type of tax is imposed on transfer of property from the owner upon death. The aim of estate tax is to prevent the entry of tax free wealth which would make the most affluent families not pay tax. Estate tax provides an exemption of $5.43 million. This type of tax is not common and only affects a mere one percent of tax payers. In other states, it may be referred to as inheritance tax and imposed differently from the federal tax system.
Property tax – this is imposed on the real value of an estate or personal property. It is charged on a recurring basis and imposed by the local governments. If you are homeowner, you will pay property tax as a monthly fee or yearly as part of your mortgage payments.
Real estate tax- this type of tax is subject to fluctuation depending on the condition of the property, location, changes, market value and any other major factors which come into play. A jurisdiction assessment is carried out to determine its value. In case the owner feels that his property is overvalued, he can file a property tax appeal. A successful tax appeal can lower the tax burden. Here’s how you can go about tax reduction when you want a reassessment done on your property;
- Request for a copy of the latest tax assessment from your municipality tax assessor’s office.
- Check to see if there are any errors in the assessment by comparing the list of amenities to the actual property that you have. If you find errors, take note of them and file a property tax appeal together with a copy of the assessment.
- Get a new assessment done on your property and get in touch with a professional appraiser through your real estate agent or the tax assessor
- Gather the necessary documentation which will support the devaluation of your property. This includes getting information on other property similar to yours and knowing their valuations. This information can be obtained from the community assessor’s office.
- The final step is to file a property tax appeal. Fill out all the necessary forms which can be obtained through the website or by visiting the tax assessor’s office. Attach all documents with evidence supporting devaluation of your property and photographs which prove evaluation discrepancies. Wait for the process which may take up to a year to complete.
Taxes on Goods and services
Sales tax- this form of tax is used by the local governments to raise revenue for various operations and projects. The percentage of sales price of a particular item is determined from the purchase of that item and becomes the sales tax. The rates vary for different items which are bought. The rate may also vary depending on your state or county. Sales tax is regarded as the most equitable form of taxation since it only corresponds with how much you consume or buy. Therefore it is kind of voluntary tax.
Excise tax-this form of taxation is based on the quantity of goods and not the value. It is determined by the federal government on different goods consumed in different quantities. For example a gallon of gas has an excise duty of 18.4% regardless of the price it is sold to the buyer.
User fees– user fees taxes are imposed on different types of taxes such as utilities, hotel rooms, financial transactions, licenses, rental cars, toll roads, airline tickets and many more.
Hotel tax– this is the amount imposed on top of the regular room charges. In certain cases, the charge may go up to 25% of the total bill and includes occupancy tax and city tax.
Sin Tax– this type of tax is meant to discourage people from consuming certain items which are addictive such as alcohol and cigarettes. Money obtained from this form of taxation is used by the government in aiding people who are suffering from using them.
Best States with Low Taxes
Individual income gets the highest weight when it comes to overall tax imposed. For this reason, you might consider moving to another state in future, if by any chance you see that the amount you are shelling out in form of tax is too much. Determining the best state with low taxation, requires a careful analysis of the various tax structures. Here, we have made the task easy for you by compiling a list of some of the best States with low tax rates.
- Alaska– the tax policy in Alaska is almost unbelievable with zero income tax and no sales tax at all. A gallon of gas attracts only 12 percent of taxation. The state also provides Permanent Fund Dividend for legal residents who have lived in the state for a full year.
- Wyoming– has no income tax and the state sales tax is only 4 percent. The property tax is also very low encouraging citizens to own much land and property.
- Delaware– does not impose sales tax while the state income tax is only at 2.2% for income ranging from $2002 to $5,000 and 6.6% for income above $60,000.
- Louisiana– has an income tax of 2% on individual income up to $12,500 and $25,000 for joint income, 6% is taxable for individual income reaching $50,000 and $100,000 for joint income.
- Mississippi– has a sales tax of 7% and an income tax of 3% for income up to $5000 and 5% for income above $10000. The gas fee is 19 cents per gallon.
- Arizona– has state income tax of 2.59% for individual income of $5000 and $20000 joint income. The sales tax is at 5.6%.
- Nevada– no income tax while the state sales tax is at 6.85%. Gas fee is at 34 cents per gallon.
It is important to acquaint yourself with tax laws and information, to help you in making wise financial decisions and be smart about keeping what you make. Getting a good grip on the various taxation policies is handy so you can take advantage of tax credits and tax deductions. Most people grumble about taxes and it’s understandable because it can be daunting as the tax code is over 74,000 pages long. What…… You read that right 74,000 pages of tax code. That takes a lot of trees. That being said, within all of that code are some obvious deductions that apply to many people and that’s what we’ve shared today. By simply understanding some basics of what you owe the government and knowing your IRS tax brackets and available deductions, you should always be on the safe side of taxation.